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Study Session 9: Equity Valuation: Valuation Concepts

ATOCF vs. NOPAT: does SGA count as a cost?

I’m just curious to know wether SGA is considered a cost in the ATOCF. I realize that one is a measure of cash flows while the other is a measure of profits. Still, I would think that SGA is a cost so that it should be included in both.

As I understand it, here are the equations for both measures:

ATOCF = (Sales - Costs - Depreciation)*(1-tax) + Depreciation

NOPAT = (Sales - Costs - SGA -Depreciation)*(1-tax)

Is there a reason why SGA is not in ATOCF?

EV and cash adjustment??

How is non-operating/excess cash ususally handled in a transaction; i know it comes down to negotiations and working capital needs, etc.  But can someone help clarify my thinking here…

H-model formula

Does anybody understand the rationale behind the valuation formula for the H-model, or its derivation?  I hate having arbitrary formulae thrown at me like this.


CFAI says to start with EBITDA(1-T) but i am confused on how to deal with Dep.  Do you add Dep(T) back because Dep is already in EBITDA but you need to add back the taxes that you don’t have to pay?  If that is the case then why don’t you add back Int (T)

Reading 35 Practice problem #8 from CFAI text

I’m am looking for help on practice problem number 8, from reading 35, return concepts. I do not understand why the ERP would have an downward bias. As I understand ERP, the bias should be upward for a period of disruption in the equity markets. Did anyone else have trouble with this problem? What am I missing? The answer provided in the text did not clarify to me why it shoud be a downward bias.

Thanks in advance for any comments regarding this question.


Valuation in Emerging Markets

Both the CFAI and Schweser books give a VERY extended approach to converting between nominal and real NOPLAT, FCinv, WCinv taxes etc. It seems hard to believe that CFAI will have us do anything like this on the exam.

Relative analysis using market multiples?

To this point i’ve felt like i had a pretty good grip on relative analysis (be it fixed income - OAS comparison, Equity - mkt price vs fundamental/intrinsic value, Equity - expected vs required return/ROE vs r) but i kind of feel like the general interpretation using market benchmark multiples is somewhat opposite.

Is there a way to solve without iteration?

Given that a firm’s current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm’s shares is $54.50, what is the required rate of return?

Tax and working capital

Is tax payable a working capital (WC) element, or should it be included in net interest bearing debt (NIBD)? What about deferred tax assets and liabilities?

Equity Reading 38


Can someone comment on step-by-step example in Reading 38, dealing with the DCF valuation under inflation factors:

Last step in the valuation for Real terms projection:

- FCF for year 25 = 170, given continuos growth factor of 2%, CV = (170*1.02)/(0.06) = 2891

- Discount factor for year 25 is 0.16 (1/1.08^24)

- Given FCFs for years 2, 3, 4, and 5 = 97, 113, 114, 116, and appropriate discount factors 0.93, 0.86, 0.79, and 0.74.

The DCF value given in the book is 1,795. How do I reach this number???